As tenants have difficulty making their rent payments, landlords in turn are defaulting on their own loans. 

Indeed, according to Trepp's Russell Hughes, there are signs that in the data that some borrowers may be strategically defaulting on their loans. That could lead to a wave of foreclosures in the coming four to six quarters.

Overall, the delinquency rate increased by 65% in Q2 from 0.36% to 0.59%. While this is a material increase, it is generally within the expected range, given the current economic conditions.

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There is good news and bad news with the delinquency rate. While it stands at the highest level recorded since the recovery period after the financial crisis, it is still well below the 9% delinquency rate for CRE loans at the peak of that recession.

However, loans with maturity dates in the next five quarters have delinquency rates higher than the overall portfolio. Inside this group, the delinquency rate for large balance loans is much higher than those with smaller balances. The borrowers for those larger loans are usually more sophisticated and less cumbered by recourse or guarantees, which makes strategic defaults more rational, according to Hughes.

"While there are certainly some borrowers who no longer have the ability to make payments, the gap in the delinquency rate relative to the broader portfolio is indicative that many of these borrowers decided that because of current circumstances, they will be unable to extend or refinance their existing loan at maturity and therefore have opted to stop making payments in advance of their maturity date," Hughes writes.

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.